THINKING OUT LOUD

Risk – Understanding It & Taking It

27 November 2019
by Rob Zdravevski

An extract from my website (www.kariasset.com.au) says….”I’m trying to achieve an adequate return on your money whilst taking the least possible risk”

I was trying to tone it down. What I really want to write is –

I’m seeking the best possible return whilst taking the least amount of risk.

Sometimes, I don’t know why I’m treading carefully because I constantly see advertisements featuring “guaranteed returns” and forecasts which seem quite fanciful in a low interest rate world.

See……as a stock-picking advisor to each of my client’s individual portfolio’s, I am prohibited from advertising my annual returns and past performance because I don’t operate a pooled fund or unit trust, which is in turn needs to be audited.

In essence, I’d need to operate and sell a product in order to post a cumulative performance figure.

Painfully, many investors use those numbers as their only measure of someone’s potential success and albeit there is some weighting of truth in that, but I also try to explain my process and thinking surrounding my investing philosophy and style.

Enough gibberish…….

So, instead, I can only suggest to a prospective client, that my equities investing style aims for a total annual return of 6% above the cash rate.

Le’s say that the AUD cash rate is 1.5% p.a., then I “hope”  for a total return of 7.5%.

I think this is a plausible goal.

The possible return is also a function (notwithstanding market conditions, analysis et al.) of the risk being taken when making the investment.

There are different levels of risk. It’s become a habit for (especially for novice) investors to simply group any investment or activity that contains a hint of risk as being “RISKY”.

You can overhear daily conversations where business or investment is mentioned, rebutted with a quick and often (paraphrased or other) uninformed answer of, “Yeah, but that’s risky, isn’t it?”

My main message in this note is…..

With good research and analysis and investment skill, it is possible to,

“seek the best possible return whilst taking the least amount of risk”, or let’s re-phrase it to an “adequate return”.

When you see outlandish and extraordinary claims of high potential returns, please ponder the following……

when the cash rates are so low, what makes investors think that It’s their “god-given” right to achieve returns of let’s say, 12%, 15% or 22% and assume they are not taking any greater risk?

You can’t shoot for stars and think you are taking the equivalent risk of holding cash.

p.s. “hope’ is not an investment strategy